THE POLICY OF DISINVESTMENT IN INDIA

ABSTRACT:
This project aims on disinvestment aims on understanding about the policy of
disinvestment with emphasis on the history of disinvestment in indian history. It
also addresses about the need of disinvestement. The project also emphasis on
the pros and cons of disinvestment. The project also gives an idea about the
consequences, causes and major stakeholders of the policy of disinvestment.

INTRODUCTION:

At a very fundamental level disinvesment can be defined as the act of selling

the equity shares of public enterprises to the private sector. A government
organisation will typically disinvest an assest for raising resources to general or
specific needs. It involves sale of only part of equity holdings held by the
government to private sectors. Disinvestment process leads only to dilution of
ownership and not transfer of full ownership. While privatisation refers to the
transfer of ownership from government to private investors. Disinvestment is
also called partial privatisation.

From a government point of view, the disinvestment strategy can be of the

following types:
•Minority Disinvestment: The Government wishes to retain managerial control
over the company by maintaining the majority stake (equal to or more than 51
percent). Because public sector enterprises cater to the citizens, the Government
needs to be able to influence company policies to further the interests of the
general public. The Government generally auctions the minority stake to
potential institutional investors or announces an offer for sale (OFS) inviting
participation by the public.

•Majority Disinvestment: The Government gives up the majority stake in a

government-held company. After the disinvestment, the government is left
holding a minority stake in the company. Such a decision is based on strategic
grounds and policies of the Government. Typically, majority disinvestments are
done in the favor of other public sector enterprises. For example, Chennai
Petroleum Corporation Limited, formerly known as Madras Refineries Limited
is a group company of Indian Oil Corporation after disinvestment by the
Government. The idea is the consolidation of resources in a company which
ultimately leads to operational efficiency.

•Strategic Disinvestment: The government sells off a PSU to usually a non-

government, private entity. The intention is to transfer the ownership of a non-
performing organization to more efficient private players in the market and
reduce on the financial burden on the government balance sheet.

•Complete Disinvestment/Privatization: 100 percent sale of Government

stake in a PSU leads to the privatization of the company, wherein complete
ownership and control are passed onto the buyer.

Department of Disinvestment used to be an independent ministry in the cabinet.

However, the ministry in 2004 was merged into the Ministry of Finance but
remained an independent department. Later in 2016, under the BJP-led
Government, the Department of Disinvestment was renamed as Department of
Investments and Public Asset Management (DIPAM). DIPAM is primarily
concerned with the management of Central Government equity stake in public
sector undertakings (PSUs) and conducting disinvestment activities as per the
yearly targets set by the Finance ministry.

Every year, the government sets a disinvestment target in the budget for the
coming fiscal year, and disinvestment is carried out according to the planned
amount. The stakeholders of the disinvestement policy of the government are
the employees of the firm who loose their jobs due to new policies and the
public who faces an increase in the price value of services. With disinvesment
the rate of services may increase which makes it difficult for the common folk
to avail these services. Examples of a major disinvestment policy in India are:

Life Insurance Corporation of India: The Government announced the

disinvestment in the largest insurer of the country this year. LIC holds
approximately 69 percent of the market share. LIC disinvestment is a unique
case as disinvestment in the state-owned insurer will demand amendments to
the LIC Act. LIC Act governs several operations of the company, such as the
transfer of surpluses, government guarantee on policies, etc.
Air India Disinvestment: The Government offered to sell a 76 percent stake in
the state-owned airliner in 2018. However, it could not receive a successful bid
then. The Government reopened their process this year in January, this time
with intention of disinvesting completely.
The disinvestment will involve a 100 percent sale of the Government’s
shareholding in the company, including Air India Express Limited and Air India
SATS Airport Services. The issue at hand is that the company is neck-deep in
debt.

OBJECTIVES :

1. To study about the History of Disinvestment in India

2. To analyse the Need of Disninvestment in India
3. To examine the pros and cons of Disinvestment

METHODOLOGY:
The study on THE DISINVESTMENT POLICY OF INDIA has been
conducted using secondary data. All the datas used in the project are from
various secondary sources and all the varying sources are mentioned in
bibiliography.

ANALYSIS AND INTEPRETATION

OBJECTIVE 1.

HISTORY OF DISINVESTMENT IN INDIA

In India for almost four decades the country was pursuing a path of
development in which the public sector was expected to be the engine of
growth. However the public sector had outgrown itself and their shortcomings
started manifesting in the shape of low capacity utilisation and low efficiency
due to over manning and poor work ethics. The government started to
deregulate the area of its operation and subsequently, the disinvestment in
public sector was announced. The process of deregulation was aimed at
enlarging competition and allowing new firms into the market. Prior to 1991
large number of indutries like arms and ammunition, atomic energy, Iron and
steel etc were reserved for PSU’s. This list by December 2002 includes only
three areas reserved for PSUs: Atomic Energy,Minerals specified in schedule to
atomic Energy (Control of Production and Use)
Order, 1953,Railway Transport. Because of the current revenue expenditure on
items such as interest payments, wages and salaries of Government employees
and subsidies, the Government is left with hardly any surplus
for capital expenditure on social and physical infrastructure.
While the Government would like to spend on basic education, primary health
and family welfare. The Government continues to expose the taxpayers' money
to risk, which it can readily avoid. To top it all, there is a huge amount of debt
overhang, which needs to be serviced and reduced before money is
available to invest in infrastructure. All this makes disinvestment of the
Government stake in the PSEs absolutely imperative.

Chandra Shekhar Government

1.In early November 1990, India faced a looming balance of payments
(BoP) crisis and unprecedented risk of default on sovereign repayments.
India needed to swiftly mobilize additional revenue, and reduce
expenditure since the import cover had dropped to an alarming level of
less than one month.
2.During this crisis, there was a proposal to mobilize resources by selling
shares/equity in state-owned public sector companies. India entered into
negotiations with the IMF for the Compensatory and Contingency
Financing Facility (CCFF), but the manner of usage of the funds raised
from the sale of equity of state-owned companies was a sticking point.
3.The government intended to use the proceeds to reduce the budgetary
deficit. But initially, the IMF opposed this because the proceeds which are
classified in accounting jargon as capital receipts, wouldn’t then be used
to retire debt, or in other economically efficient ways.
4.India convinced the IMF that considering India’s economic challenges,
at this juncture, it would be better to allow fiscal managers to use it to
bring down the deficit.
 5.The interim budget of 1991 was the first to mention the sale of assets of
Public Sector Enterprises. It used the word ‘disinvestment’ because
‘privatization’ was politically unpalatable. However, due to political
instability, the plans remained unimplemented.
P V Narasimha Rao Government
1.The first sale of shares of public sector firms in small bundles to mutual
funds and institutional investors happened in 1991-92 under P V
Narasimha Rao-Manmohan Singh combine, who ushered in the 1991
economic reforms, but they too faced a difficult time in its
implementation.
2.The World Bank, with which India was in negotiations for assistance,
took the stance that proceeds raised through the sale of equity of public
sector companies should be used only to reduce the government’s debt.
During negotiations in September 1991, Finance Ministry again managed
to persuade the World Bank that given India’s fiscal challenges, this
couldn’t be done under the current circumstances.
3.Industrial Policy Statement of 1991 provided for a complete review of
public sector investments to focus on strategic and essential infrastructure
undertakings and new methods to tackle chronically sick and loss-making
units.
4.In the latter half of the 90s, the range of disinvestment was gradually
increased by the subsequent coalition governments to bring about a clear
distinction between strategic and non-strategic enterprises so as to reduce
government shareholding to 26% in non-core enterprises through
incremental disinvestment or strategic sale while retaining majority
shareholding (51%) in strategic enterprises.
I K Gujral Government
1.A Disinvestment Commission was established in 1996 by the
government of India, to carefully evaluate the withdrawal of the public
sector from non-core, non-strategic areas and assure workers of job
security and opportunities for retraining and re-employment. It
recommended the sale of equities or outright sale of several PSE’s,
including Air India.
 2.That year’s budget promised to make use of the revenue from these
equity sales for education, health, and to set up a fund to strengthen
Public Sector Undertakings. But for years, most of the money has been
routed to the Consolidated Fund of India, to reduce the deficit.

Atal Bihari Vajpayee Government

1.In the 1998-99 Budget, the government announced that it would lower
its shareholding in public sector firms to 26% while continuing to hold
the majority shares in c that were considered strategic. It also contained a
promise to protect the interests of employees and to set up a restructuring
fund to provide compensation to employees.
2.It also introduced the concept of strategic sales in public sector
companies some of which include the sales of Modern Bakeries,
Hindustan Zinc, and Balco, and disinvestments in these fuelled major
controversies as well.
3.Via strategic sales, privatization was envisaged only in non-strategic
areas. The demarcation was redefined by the Government in 1999 to
include only defense-related, atomic energy undertakings and railways
among strategic enterprises and treat all other enterprises as non-strategic.
4.The government’s determination to take the policy through was
reflected in the setting up of a new Department of Disinvestment in
1999, which, in 2001, became a full-fledged Ministry.
Manmohan Singh Government
1.The government was not keen on treading the strategic sales route. The
UPA manifesto in 2004 said it would take up privatization selectively.
Unlike what the NDA had done, there would be no disinvestment just to
raise funds to meet short-term targets. Proceeds of disinvestment would
be used for designated social welfare programs.
2.In pursuance of this, the government formed a National Investment
Fund
(NIF) in 2005, to which the funds raised from disinvestment were
channelled. The purpose of the Fund, managed by professional
investment managers, was to utilize 75% of the proceeds to fund social
welfare schemes in education, health, and employment. But due to the
 financial crisis of 2008-09, and later a drought, this was put on hold for 3
years, and later in 2013, it was restructured to provide flexibility in using
the Fund.

Narendra Modi Government – Present Status

1.Even though the moratorium that the UPA govt had placed on strategic
sales in 2009 has been lifted, it is pretty evident that Prime Minister Modi
is not planning to mimic British PM, Margaret Thatcher.
2.Thatcher was of the firm belief that the government had no business to
be in business and had led the UK in the 1980s to privatize 670 of its
public sector enterprises. This policy was in tune with the theory of New
Public Management (NPM) which was gaining prominence.
3.If Thatcherism (privatization) was about exiting business via the
transfer of state assets and companies to private ownership, the new
disinvestment policy of Modi might lead to increased government
control of public sector enterprises.
4.The intent of the new policy is not to downsize the public sector but to
alter it so that assets, including land and cash balances of PSUs, can be
hived off and utilized for investment in new projects. The renaming of the
Department of Disinvestment as the “Department of Investment and
Public Asset Management” (DIPAM) is a reflection of the new
thinking.
2. NEED OF DISINVESTMENT IN INDIA

The new economic policy initiated in July 1991 clearly indicated that PSUs had
shown a very negative rate of return on capital employed. Inefficient PSUs had
become and were continuing to be a drag on the Government’s resources
turning to be more of liabilities to the Government than being assets. Many
undertakings traditionally established as pillars of growth had become a burden
on the economy. The national gross domestic product and gross national
savings were also getting adversely affected by low returns from PSUs. About
10 to 15 % of the total gross domestic savings were getting reduced on account
of low savings from PSUs. In relation to the capital employed, the levels of
profits were too low. Of the various factors responsible for low profits in the
PSUs, the following were identified as particularly important:

•Price policy of public sector undertakings

•Under–utilisation of capacity
•Problems related to planning and construction of projects
•Problems of labour, personnel and management
•Lack of autonomy

Hence, the need for the Government to get rid of these units and to concentrate
on core activities was identified. The Government also took a view that it
should move out of non-core businesses, especially the ones where the private
sector had now entered in a significant way. Finally, disinvestment was also
seen by the Government to raise funds for meeting general/specific needs.
In this direction, the Government adopted the 'Disinvestment Policy'. This was
identified as an active tool to reduce the burden of financing the PSUs. The
following main objectives of disinvestment were outlined:

•To reduce the financial burden on the Government

•To improve public finances
•To introduce, competition and market discipline
•To fund growth
•To encourage wider share of ownership
•To depoliticise non-essential services
Presently, the Government has about Rs.2 lakh crore locked up in PSUs.
Disinvestment of the Government stake is, thus, far too significant. The
importance of disinvestment lies in utilisation of funds for:

•Financing the increasing fiscal deficit

•Financing large scale infrastructure development
•For investing in the economy to encourage spending
•For social programs like health and education

Disinvestment also assumes significance due to the prevalence of an

increasingly competitive environment, which makes it difficult for many PSUs
to operate profitably. This leads to a rapid erosion of value of the public assets
making it critical to disinvest early to realize a high value.

3. Pros and cons of disinvestement

PROS:

•Reduce the burden on the government: Disinvestment of loss Making

PSU’s, would help the government to invest in profit-making PSU’s
which will minimize the burden on the government
•In the private sector, the decision-making process is quick and decisions
are linked with the competitive market changes.
•The disinvestment process would bring in better corporate governance,
exposure to competitive corporate responsibility, improvement in the
work environment, etc.
•The market participation in the capital of PSUs through stock exchanges
would enable the market to discover the latent worth of PSUs.
•The loss-making PSUs can be successfully revived by asking the
strategic partner to infuse fresh capital and exercising excellent
management control over sick PSUs.
• Privatisation would facilitate transferring the commercial risk to which
the tax payer’s money locked up in the public sector is exposed to the
private sector wherever the private sector is willing to step in.
CONS:

•Selling of profit-making and dividend-paying PSU would result in loss

of a regular source of income to the government.

•There would be chances of ‘asset stripping’ by the strategic partner. Most

of the PSUs have valuable assets in the shape of plants and machinery,
land and buildings, etc.

•The government’s policy or disinvestment includes the disposal of both

profit-making, as well potentially viable PSUs.

•Strategic and National Security Concerns: Strategic Disinvestment of Oil

PSUs is seen by some experts as a threat to National Security since Oil is
a strategic natural resource and possible ownership in the foreign hand is
not consistent with our strategic goals.

•Raising funds from disinvestment to bridge the fiscal deficit is an

unhealthy and short-term practice. It is said that it is the equivalent of
selling ‘family silver to meet short-term monetary requirements.
•No monopoly is good. Only fair and full competition can bring relief to
consumers.

FINDINGS:
From the above study conducted on the Policy of Disinvestment in India the
major causes for the government adopting disinvestment are as follows:

•To improve public finances and To reduce the financial burden on the
government
•To encourage a wider share of ownership
•To introduce competition and market discipline and To fund growth
•To initiate the diversification and expansion programmes
The major consequences of disinvestment are:
•Fear of price rise due to monopoly
•Fear of foreign control when a foreign company buys the major stake of the
disinvested company
•Loss of employment due to privatization
•Loss of public interest, etc

SUGGESTIONS:
The government can bring a major change in the exsisting disinvestment
policies by making wise decisions. The government should take intiatives to
provide alternative jobs for the commonfolk who are fired from their jobs after
disinvestment of the government equity. The government should also take steps
to monitor the working of the private players.

CONCLUSION:
Disinvestment has been a common feature adopted by various governments in
most union budgets since the 1990s. Each year, the government aims to raise
funds by selling stakes in various public sector enterprises. Assets and
enterprises are selected for disinvestment based on various factors like portion
of government stake, interest from the private sector, general market conditions,
valuation, etc. Disinvestment has shown mixed results as far as achieving
government revenue targets is concerned.
The process of disinvestment undertaken by the government has enabled it to
overcome various challenges such as reducing the fiscal deficit, generating
capital to channel for welfare schemes, infrastructure projects, etc. However,
the government will need to ensure confidence in the sale processes.
BIBILIOGRAPHY AND WEBOGRAPHY
BIBILIOGRAPHY:
• Introductory to Macroeconomics class 12
• The Hindu newspaper
• Disinvestment in India: Trends, Problems, and Prospects

• Disinvestment in India:I Lose and You Gain

WEBOGRAPHY
• www.bsepsu.com
• www.scribd.com
• www.neliti.com
• www.neliti.com
• www.studocu.com